00:00 the next decade is going to belong to stock pickers. I don't care if that's technology companies, growth companies, industrials, financials — all of those have reasons to pick stocks and not the index, and the indexes will not outperform selecting stocks. And the ability to identify, do research, select companies that are well positioned and have valuations that are attractive — that is something that can be done today, and there are fewer people doing that.
00:39 The president and chief investment officer of Robotti and Company, and he's beaten the market by an enormous margin over the last 40 years. It's great to see you, Bob. Thanks so much for joining us. Oh, thanks so much for having me here, and it's so good to see you. I wanted to start by chatting with you about your childhood in Queens in New York City. I know you were born in 1953 and you grew up with two older sisters and a younger brother, and I read somewhere that you lived in an apartment above a
01:12 dry goods store called Robotti's department store that your grandmother had operated, and that then later — I think when you were about one — your father Edward launched a property and casualty insurance brokerage firm also out of your home. So I wanted to get a sense of what it was like growing up in that kind of environment where you really were surrounded by business. Well, it's more modest than that. My grandfather did own the building, and the store was
01:48 downstairs, we lived upstairs, and the department store didn't do a lot of business because it had been put out of business. If people in the neighborhood wanted to go to Macy's, it was easy enough to get in the subway and go. So decades before, it really was probably a business that was critical to the community, but really wasn't that. So it was not a thriving business, but it was more an opportunity for me. When we played stickball up the block, if we lost the spaldeen I would get the spaldeen from
02:14 my grandmother's store. And then my dad started, kind of upstairs originally, in the living room — started an insurance brokerage business. I guess when he was 17 he had gotten some kind of disease that actually blinded him, and for most of his life he had significant sight problems. So eventually, probably with my grandparents' help, he did start that business, and therefore he started that brokerage business in our house, and I did see it grow from the inception.
02:45 As a kid I worked in the business with him and helped some — not that much, I was not early pitching in doing a whole bunch of things, but I do think it was interesting because it gave me a sense — as a joke, I understood the property casualty business because my father was a broker, but he did underwriting. When the Paganos across the street wanted insurance — that's the guys who ran the numbers and got arrested every so often for making book — they came in, they went with this insurance company; but
03:18 the Vosis up the block, where they came in, they tipped the car, didn't go any place, was really pristine, he put it with his top-rated company. So he was effectively underwriting, knowing which ones have exposure here, which ones don't. So how that works and how the insurance business works, I had a ground-floor opportunity to understand a business that's a strange business — property casualty insurance is its own little industry with its nuance. So it was interesting. And am I right in thinking your
03:49 family, at least half of it, came from Italy? I think I had read somewhere that your father, who had this wonderful name — which I don't know if I'm pronouncing right — which was Baptist Robotti, actually helped to build the Empire State Building when he came to America. So my grandfather, who is Baptist Robotti — we lived in Long Island City, there was a stone company down the block, Hoyle Gillies and Sons, and Gillies and Sons had been in business for many years. Fortunately, his good fortune:
04:17 the original chief draftsman was the son of the owner, and the son in a major building forgot there were four sides to the building and he only bid it for three sides to the building. So when they lost an awful lot of money, he lost his job and my grandfather got promoted. And the company did a lot of work with limestone, and it was a critical change in construction. The Chrysler Building was one of the two buildings that fought with 20 Exchange Place for the tallest building — it's the last brick building that was built, it's the
04:46 tallest brick building in America, in the world. And then of course when you built the Empire State Building you went to limestone, so you could put up steel girders, you can slap pieces of limestone on it. So there was an extremely efficient way to do that, and that was the company that my grandfather had worked for. He was the chief draftsman. So we have in our conference room a couple of blueprints — I have it from the 47th floor of the Rockefeller Center, because then after
05:10 they did the Empire State Building, depression came, and Rockefeller Center was built, and that's all limestone. He didn't work on that, he worked on St. John the Divine. So he was fortunate, happened to be at the right place at the right time, and ended up with a phenomenal job during the depression, and really did pretty well, accumulated some money. So we owned some real estate down the block from the neighborhood we grew up in, and that gave the family definitely a good sounding place to start from. So you
05:43 went off to quite an old and distinguished Jesuit high school, I think, and then went to Bucknell University. And I remember hearing that you graduated, you said, with a C as an accounting major, and that you didn't apply yourself, you weren't a good student — is that right? You just were not hugely driven or ambitious as a youngster? Well, I was driven and ambitious, but not for studies. In high school I did reasonably well — progressively so. In grammar school I was the valedictorian
06:15 of my class, but then in high school I did okay. I was the top third, but I was busy trying to play flipball and do other things, and occasionally did some studies. I spent my junior year figuring where I was going to go to college, because I knew I was going to goof off, I knew I was going to get a C, and I figured the better the school I can get into, well then the better the C from that university. So as it turned out, Bucknell, Lafayette, Lehigh, Colgate were the schools that I identified that
06:46 I thought were in the tier that I could get to. And that was also what I applied as a major, because my verbal score was 490 — I'm a kid from Queens, I can't speak, I can't write English — but I did get a 710 math. So when I applied to Bucknell, they have a really good engineering school, so I'm not going to apply there because it'd be harder to get in, but they have a business school that at the time nobody had applied to, so it was mathematically oriented and therefore I could hopefully skate in when I shouldn't have
07:13 gotten into the school. And I ended up — I got into Bucknell and I graduated with my C, exactly what I thought would happen. I fulfilled my expectations, to my disappointment probably in aggregate. So yes, and I attribute large part of my success to the fact that I got that C, and the fact that when I got to Bucknell the question was, what major do I have — is it a management major or an accounting major? So here I'm with the football team, talking to players, and say, okay, which is the easy
07:45 major, management or accounting? And they say, oh, the accounting professors are guts, you're going to become an accounting major. So that's how I selected accounting as my major. I got in through the business school, which is the easier part of Bucknell at the time, and then I became an accountant because the accounting program was easy. So when I graduate with a C, well, I'm not going to get a job with the big accounting firms — there were not four but eight of them still — and in New York there were 25 large
08:12 accounting firms, but none of them could I get a job with. So the job I did get was — my father's childhood friend was a guy named Fred Pelosi, and he had a small accounting firm, Pelosi January. In my last year he gave me an internship, and I didn't make a fool of myself, so he thought, okay, maybe the guy just didn't apply himself and is smart enough. So I started working for Pelosi, and I fell into the right place, that opened up all these opportunities that formed my life. Anthony Pelosi turns out
08:50 to have been an incredibly important figure in your life, and I was reading about him the other day because he also was a professor to Mario Gabelli as well, who, we'll discuss, became an important figure in your life. I think you and Mario ended up endowing the Anthony Pelosi distinguished professorship in accounting. So tell us about him and what he did that set you on this extraordinarily fortunate path, by directing you to places like Tweedy Browne and Mario Gabelli's nascent firm. So that's what happened. When
09:23 I get the job for them, I also realized accounting is the profession where there's a right answer and a wrong answer, not "what do you think and give me your views" — this is right and wrong. So I did start my MBA at Pace University four days after I graduated Bucknell, and I went four nights a week, three hours in the evening, and spent the weekend studying. That ended up being a great experience. The combination of working for a smaller accounting firm where I spent time in audit, spent time in tax, I moved around —
09:53 two-person firm — so you're applying during the day and at night you're learning the concepts of accounting, therefore the concepts become easy when you actually apply it. Accounting is a boring major, a boring subject for many people, but it wasn't for me — I could see it live and in action in the information they gave me about companies. The business of Pelosi had two pieces: one, I would do daycare center audits in the worst neighborhoods in New York. This is 1975, New York City's
10:22 about ready to go bankrupt, there's been an urban flight out of New York, businesses and individuals, so it was a tough time, and I would go to very tough neighborhoods. That was the one part of the practice. But the other part of the practice was there were all these investment advisers that were the clients of Pelosi, and one of them was Tweedy Browne. So for four years that I was there I worked on the audit of Tweedy for two, three, four months of the year, and that was a formative experience at
10:51 a formative time, because the timing could not have been more opportune for me. It's 1975, so you have '73, '74, the market correction — market down 50%. One-decision stocks didn't matter what price you paid for them, you bought them, you owned them, because you'd absolutely always make money at them — potentially analogous to where we are today in certain ways — had come in, corrected, and therefore it was the starting gun for value investing. So Tweedy became an overnight success after being in business for decades, because what they did and
11:29 how they did it was something that was at the right place at the right time. They owned the right kind of company. So them and Mike Price, Mutual Shares, Gabelli — even Buffett became well known around that time — because value investing stocks really substantially outperformed. So I happened to walk in, and then at Tweedy, who was there? When Graham-Newman closed up shop, next-door neighbor was Tweedy Browne. So Tom Knapp walked next door, and then Walter Schloss next walked next door, and they were in the office when I was there. And Anderson was recruited
12:07 from Charlie Munger to come in to run Tweedy, because Chris was too young to run it at the time. John Spears had just started working there. So all these people were there, and they sat around a trading desk. I knew what Tweedy owned, what they bought, why they owned it. And one of the retired partners was a guy named Joe Riley — it was originally Tweedy Browne and Riley. Riley was in every day; that's where the audit sat, with him, and at 6:30 we'd talk about investing. So I saw what Tweedy did, I saw what they owned, Joe worked with
12:38 me, went through the investment process. So it was a great introduction to investing, and as a result I never was a finance major, I didn't know the market was efficient, so I didn't understand that nuance. Instead I thought it was pretty inefficient, because you can pick stocks that were substantially undervalued. And Tweedy Browne, for our listeners who don't have a sense of it, was such an extraordinary firm — I talked to John Spears about it on the podcast, for people who want to go back and listen to that episode — but literally
13:10 this is the place where Buffett bought the bulk of his shares in Berkshire Hathaway. He wrote about the company in his famous essay from 1984, "Super Investors of Graham-and-Doddsville." So these guys were real stars, but this was at a time when no one really wanted to do value investing. They were mainly looking at these tiny stocks on the pink sheets and the like. Can you give us a sense of the opportunity that existed where you started to see — oh, if you actually look at small companies and
13:44 particularly undervalued companies that are sort of off people's radar, there's a tremendous opportunity there? Because it seems like in a way they established a kind of template for your career — of looking at very cheap undervalued stuff that was off everybody else's radar. In the first John Train book the chapter on Tweedy is called "The Pawnbrokers," because Tweedy's specialty was making markets in all of these pink sheet stocks. And pink sheet stocks at the time — there were a lot of them — because what
14:13 those were, were securities that were companies created before '33 and '34. Before you had '33 and '34 and the registration that came from that, you had companies that had gone public in a way but therefore weren't subject to the SEC reporting requirements. So there was a significant number of these companies, and that was originally Tweedy's differentiator. They bought net working capital in a time when you could do that, because these companies were also more obscure and out of favor, and then
14:43 the vagaries of the market — there was not the universe that people were looking to invest in. They were looking at the Nifty Fifty; that's where capital flowed to, that made sense, that's where you made money. So they were obscure companies that were neglected, and therefore had valuations that were extremely discounted. So I'm a CPA, therefore I can calculate net-net working capital. This was not a sophisticated business, and it wasn't
15:09 technology that you had to understand — this was looking at a balance sheet and doing an analysis and finding companies that were trading to far less than what the liquidation value of the business was. And Tweedy had grown successful, so eventually when I started my own firm we did a lot of pink sheet stocks also, because Tweedy couldn't put capital to work into it efficiently, they were doing a lot less in it, so it opened up the opportunity. And that was easy work to do, to be able to buy cheap stocks, and that's what
15:40 we initially did. There are a couple of things I'd like to highlight as we keep going through this story, so we start to draw lessons relevant for our listeners from your early career. The first: you had real skills — the fact that you had this hard accounting background gave you some kind of competitive advantage; the fact that you were looking in an area where other people weren't looking, for the most part, was a tremendous advantage. The other thing I think
16:10 was key is that older generation you were seeing — Joe Riley, and I think you mentioned Walter Schloss who kind of camped out in that office in a corner, and you knew Irving Kahn as well, who I wrote about in "The Great Minds of Investing," who famously lived to 109 and was another of these great old investors. They had internalized these very timeless principles from Ben Graham that you were indoctrinated with early on. So I wanted to get a sense from you — when you think of the most
16:43 important tenets, the principles that you came out of that period of four years at Tweedy Browne, what would they be? I guess the most important things are the foundational emotional things. Markets are inefficient, and there is opportunity, and the inefficiency provides huge opportunities. I've never thought the market's efficient, and today I think the market is less efficient — especially in a timeline if you look at a three- to five-year basis, there's a whole bunch of
17:14 mistakes that investors and markets are making today and providing great opportunity. The other experience I had: the very first thing, the first security I ever bought, was in 1975. I did buy New York City Housing Authority bonds. The city was going to go bankrupt, so the housing bonds traded at 33 cents on a dollar. I thought, maybe this can go bankrupt, then maybe if I buy a dollar for 33 cents — again, that's a value, easy to do the calculation to see I can see how there's value in that. And as it turned
17:49 out, the city didn't go bankrupt, and my Housing Authority bond paid off at par and I collected significant interest in the short term. So the very first security I happened to buy was a troubled, financially distressed situation. And the other thing is, I have the rule, I don't sell stocks. I tend to own things forever, and so eventually things work out, and huge opportunities come from things that have been abandoned, exhausted, and depressed,
18:28 because the valuation only goes down when you disappoint, and therefore the spread between what the value might be and what the price is in the marketplace gets wider and wider, and the opportunity gets greater and greater. There was a very nice quote that I read in one of your shareholder letters that summed up nicely the core of what you do, where you said: "The price you pay is the most critical element in all investing. No matter what is happening in the world, no matter how crazy it is, the price you pay is the one lever you can
19:00 always control." Can you talk a little bit more about that, because it seems like such a fundamental tenet that a lot of people who've gotten carried away with the Nifty Fifty stocks of our own era seem to be forgetting? Well, in today's world valuation is particularly important, and it's something people have kind of forgotten. It is a critical element. Frequently it's not the real determinant of the value we pay initially, because we frequently find that in the interim,
19:35 once we buy it, as with many value investors, we buy it too soon, and the value becomes troubled. But as I said, I don't sell, so as it becomes more troubled — either the situation and/or the price discounts more — then I have a recurring pattern of, I buy more. So I do say that the stocks we made the most amount of money in over time are ones that initially, after our purchase, disappointed and traded down. So the idea that somebody has rules — if it's down 20% I'm out of the
20:09 stock, I move on — it's nonexistent in our conversations. And the corollary to that: Buffett's famous for saying the first rule of investing is don't lose money, the second rule is don't forget the first rule. Well, we forget that rule all the time. We'll buy things that are troubled and financially stressed and have risks to them, including the solvency of the business, and we've done that and we've
20:28 been too soon and they have gone bankrupt. But the opportunity in that business, in that industry, persists in a different form, and therefore we make sure we follow the next buyer. So in manufactured housing, when that happened in the early 2000s, when Fleetwood went bankrupt and Palm Harbor went bankrupt, and both of those successively were bought by Cavco, well, we bought Cavco. So the opportunity continues to persist even if the company doesn't. And the opportunities become substantially greater when that stress is happening, and the economic response to stressful situations in poor economics and industries. When Tidewater went bankrupt I bought Tidewater out of the bankruptcy, again, and loaded up on it.
20:59 Before we move on from the Tweedy Browne portion of your career, can you tell us if there were any particularly memorable moments — for example in 1987 — where you saw the reaction of these old-timers, the Joe Riley types or the Irving Kahns, and you saw how they dealt with extreme
21:36 volatility? Well, 1987 was a particularly interesting time. It wasn't long after I had started the business — I didn't really have much of a business yet. Market corrects as much as it did, I thought about my grandmother's farm upstate New York, still in the family, said, well, maybe I'll go farm my grandparents' farm. But what happened was, one of the big investments we had was in a company called Phlcorp. And Phlcorp was the recapitalization of the old Baldwin-United, had been in bankruptcy and
22:08 come out of bankruptcy, and Leucadia National — Joe Steinberg and Ian Cumming — had identified it and acquired control of the company. So it was a focal point of what we were doing in 1987. The stock traded at $5 a share, and one of the things they had was a surplus note in an insurance company in New York called Empire Insurance. Now, my dad wrote insurance business for Empire, so I had met the CEO of the company at a broker's dinner one night,
22:42 so I called them up and met with the CFO to say, gee, you're in the process of demutualizing. That's what it was — the demutualization process was a year and a half underway, and what was going to happen was the equity was going to be distributed in return for the surplus note. They were going to own 75% of the company. The company the year before had earned $18 million, so they're going to earn $13 million, there's 13 million shares, so there's a dollar of
23:10 earnings that will pop up out of nowhere. It's a $5 stock. What Leucadia, Steinberg and company had done through the year that they controlled it was, they were selling off assets and raising cash, eliminating all the debt, accumulating cash. In the meantime they said, oh, if we sold it, the loss they took
23:31 through the income statement. So the earnings looked terrible. In the meantime they said, if it was a gain, well, we had intended to sell it, and under quasi-reorganization accounting we're going to book that directly into stockholders' equity, so we're not going to take that through the income statement. So they're putting all these losses through the income statement, they're not reporting the gains, accumulating cash, and this insurance company's got to pop out of nowhere. So I'm excited — this $5 stock's worth two,
24:00 three, four times that, and it has a huge NOL and use it as a mechanism. Then the crash comes, and of course everything goes down when the stock market crash comes, so it goes from five to three. And then what happened was, Leucadia in 1987, 1988 created a huge amount of value — Phlcorp, the demutualization of Empire Insurance — they eventually then took private at a fraction of what that business was worth. So those things gravitated my interest, and the value was so clear and compelling at
24:40 the time that it was like, this is a great opportunity. And confirmation that Leucadia knew that, because they proposed all these transactions where they would try to buy the whole company, take advantage of the fact that the market was inefficient, and they understood what the values were here and they were far away from what the intrinsic values were, and were opportunistic. So it's easy to be opportunistic and invest when somebody that's really smart, that really knows the situation much better than you do, is investing their own capital,
25:06 and if I can go alongside that, that's a great opportunity. So that was an opportunity based on a fact pattern and a situation that was critical and informative for us. It seems like one of the major evolutions you went through in terms of your investing style was that you started to understand the power of aligning yourself with these owner-operators — like Joe Steinberg at Leucadia, or more recently Christian Siem at Subsea 7, or the Gottwald family at Ethyl Corporation, or the Chow family at Westlake — where you could see that there were really smart
25:43 capital allocators. So you weren't just buying cheap stocks; something shifted. Can you talk about that, because it seems like such an important part of your own evolution as an investor? Well, we bought cheap stocks originally, and cheap stocks frequently sometimes deserve to be cheap because they're really not a good business; but certain times they are controlled by someone who is a great capital allocator who also sees the same opportunity and is buying in and is using it as a vehicle. And therefore
26:13 how they think about that, what they do, really changes the opportunity set. And that's frequently in businesses that are cyclically depressed, that are going through difficult times, so someone who has a longer-term vision. So over time that's what we've done — we identify these opportunities from aligning with the right people who can be opportunistic, who have the capability and the ability to do that from an intellectual point of view,
26:42 to capture those opportunities. So that has been critical — what worked, who to align with, who to invest with, and what situations, because sometimes it's not just the people and it's not just aligning. It is a business that is substantially discounted and opportune. So one or two of the building-related companies were not based on a better management; it was a better business that was in a consolidating industry that was extremely well positioned. So there's a
27:15 combination of factors. I do say investing is a mosaic — there's a lot of things you look for, and you don't necessarily have to have all of those pieces for it to be a compelling investment opportunity. When you're trying to assess the management and the quality of these people, whether it's a Christian Siem or a Bruce Gottwald or a Joe Steinberg or the Chow family, what are you looking for that's a good indication this is someone you want to align with, and what are you
27:43 looking for inversely that makes you think, God, I'm staying away from these people? No, I don't stay away. In 1987, 1988, with Leucadia being opportunistic — why we were shareholders in Phlcorp — actually I remember Alan Kahn connecting me with Chuck Roy and going to visit him, and Whitney Tilson saying you should buy Phlcorp; and a year later Whitney Tilson calling me up and saying, why'd you tell me to buy Phlcorp, why didn't you tell me to buy Leucadia? That's where the value is being
28:08 transferred to. This stock's cheap, and in Leucadia I just saw what they were doing, I saw the opportune situations and the discounts. So I lived through Leucadia; I didn't know Leucadia and have the history of it — as opposed to Christian Siem, when I came across him he had already had a record of being successful in acquiring assets in depressed businesses at an opportune time, capitalizing that, converting the company, merging it into someone. So he had already — other
28:36 people, as life has gone on — the Gottwalds are people who clearly have a long-term, decade-long record before I came across them, to say these are money makers who think about capital allocation, because they own a lot of stock themselves and understand the businesses, and not only control it but understand, how do you allocate capital, therefore maximize the opportunity for investing. So it's different in those situations, because in 1987, 1988 with Leucadia I sued them three times. When I started in
29:06 business and you're buying small companies that have a huge disparity between price and value, controlled by a really shrewd guy — one of the things really shrewd people do in situations like that is take advantage of that market disparity, and therefore they start to do things that they can. And part of that outcome is, as the little minority shareholder, I used to be like, gee, that's not fair and equitable, and so I was the named plaintiff in 25 class action lawsuits,
29:37 and three of them were in '87, '88 against Leucadia. So there is risk in it. Even today, actually, I was having a chat with Alan Kahn and we were talking about Siem Industries and Christian and his concern about what's going to happen with Siem Industries, and I said I don't know what's going to happen there, and you're at risk that the asset value is different than the trading price of the stock, and there may be a
30:08 movement of value that doesn't get equally dispersed. In these situations when there's a guy who controls the company, you deal the deck: one for you, one for me; one for you, two for me; one for you, three for me; one for you, four for me. So that's a risk. But if
30:24 you buy a big enough discount — if you're getting half of what it's worth — that's probably a really good rate of return. So that's part of the equation: what is this thing worth, and what is the opportunity, and therefore if I don't get full value, do I still make a great annual rate of return in that investment? I wanted to go back in time a little, to after you graduated from Pace business school in I think 1978, and you got a job, also through your professor Pelosi, working with Mario
31:00 Gabelli, and you were there from 1980 to 1983, at a time where Mario wasn't well known at all. You spent three years there, and you've said before that you would listen every day — even though you were the CFO — to him talking about his favorite investment idea every day. Can you talk about those experiences and what you learned from Mario, who's very, very sharp? I've interviewed Mario a bunch of times, and I'm told by friends who worked with him that he was not an easy man to work with,
31:32 but clearly very sharp and full of bombast and a great researcher. What was that experience like for you? Well, we already knew who he was — Alan Abelson had already discovered Mario — so his business didn't in any way match his persona, personality, and reputation. When I started working for him in 1980, he started the firm in '77, so when I started there were 12 people who worked there, he managed $7 million. The main part of the business was, he was originally an institutional analyst on the
32:09 sell side before Mayday rates happened, and that was a lucrative business, and that business from '72 to '77 disappeared. And then it ended up — William Waer, where he was at, got bought by Drexel Burnham, he spent three weeks at Drexel Burnham and decided this is not what he wanted to do, so he went out and started his own firm. His main business at the time I was there was doing institutional brokerage business, so that was the economic driver. $7 million is what he managed
32:44 when I first started to work for him, and that was only the beginning. The amount of capital, the intelligence he had, the fact that one of the industries he was very active in was the cable industry and entertainment, and that business was in the process of exploding. So a combination of factors, and he is very quotable but has a persona that Alan Abelson loved and broadcast — those things all helped Mario defrog. When I left, he only managed $77 million, so it was
33:17 still a very modest amount of money, but every day he had his morning meeting, because it was his brokerage business, to talk to the four salespeople to go out to sell the idea he had, and he'd go through his investment thesis. I had an executive MBA program taught to me almost one-on-one by Mario Gabelli for three years, where he went through his favorite investment thesis and what it was and what the company was, and he paid me to attend the class — I didn't pay him to attend class.
33:42 So it was a phenomenal opportunity, and it was a 12-person firm, and I was the chief financial officer, chief operating officer. When I first started to work for him in 1980, we used to clear through Bache and company, and that's 1980, the silver with the Hunt family, the silver implosion, and Bache is going to go out of business, and we're a broker-dealer, so our money is not protected. So Gabelli is in the process of potentially losing all its capital, and so
34:13 we had to scurry around and move the business and get that out of the way. So things happened that were really interesting, and I worked with Mario intensively on a one-on-one basis that entire time. He's a great businessman in addition to being a great investor, so that experience — again, couldn't have asked for a better opportunity. What stuck with you in terms of how you analyze investments, how you talk about investments, but also how you run your own business? Because he's shrewd —
34:45 it struck me, I think the last time I interviewed him, he said to me, no, I don't read any books, I never read a book, why would I waste time reading a book, I read all these journals every day, I'm just an information junkie, an information hound. So he's got a very distinctive personality, this sort of vicious appetite for information, for getting an edge. Was there stuff that just by watching him operate you think has actually stuck with you, or are you very different? Well, personalities are
35:16 very different, because he is a taskmaster, he's hard to work for, demanding, has high expectations, and doesn't let you know sometimes if you don't meet those expectations — a different person than I am. But in terms of interest and curiosity — I hate to say it on air, but I don't read books either. I hate that, at the end of interviews where people always say to you, what's your favorite book, what have you read, and I feel like I'm an
35:44 idiot now because I don't read any books. I read reports, I read letters, I read journals, I read all these other things, so I have an interest in stuff but I don't read books. So there's a similarity we really do have between us in that way — interest in businesses and how they work and how they operate. And I think that's been a critical thing — understanding the latent earnings of businesses that are not earning something today. So
36:11 that's a phrase that comes up a lot when you do value investing and asset-based companies — you talk about value traps. I think value traps are kind of like, in what time frame are you talking about? Because recently I hosted a dinner about a month ago, I had about 10 of us there, and I invited a bunch of people who are still in value investing, active management, managing much less money than they used to, including people who don't do it anymore
36:40 because they converted it to a family office because they've given up and been giving back the money and don't want to do that anymore. And the nature of my dinner was — I called it "the restoration of the fallen," using the line from Horace that Graham has at the beginning of "Security Analysis." And that's what I think — I think the next decade is going to belong to stock pickers, and I don't care if that's technology companies, growth companies, industrials, financials — all of those have
37:09 reasons to pick stocks and not the index, and the indexes will not outperform selecting stocks. And the ability to identify, do research, select companies that are well positioned and have valuations that are attractive — that is something that can be done today, and there are many fewer people doing that. That is not a productive effort out there today, and therefore that means the competitive landscape is extremely limited, and that's where the differentiation is going to be. It's not going to be owning an index, it's
37:41 going to be owning stocks. So that's the restoration of the fallen — stock pickers, active managers, in the next decade I think have a bright future, and I'll be shocked if they don't have performance. Let's unpack this in
37:57 more detail, because it's such an important idea — this idea that we're going to see the revenge of the stock picker. I saw you recently you said we're entering a new golden age for value investing, stock picking, and active management. As we're trying to understand why that could be, can you explain this totally anomalous, weird period of distortion that we went through after 2018 that in some way has set people up to believe certain principles that may not turn out to be permanently true? Two years ago in my letter I
38:32 talked about Financial Brigadoon, and said that's the world in which we live today. Brigadoon — it's the Lerner and Loewe play from the '40s, and it's about two gentlemen on a trip to Scotland wandering across the moors and coming across a little town, Brigadoon. It's an idyllic little town, everything about it just lovely. They leave, and they come back the next day only to find the town's not there anymore. They ask someone what happened with Brigadoon, and the guy says Brigadoon only shows up one day a year every
39:03 hundred years; it's gone. And that's what we have today. We have, post the financial crisis, an extremely anomalous period of time, an extended, extremely anomalous period of time, and the fact that it exists for as long as it did convinces people it was the new norm. So the distortions of people's thought process — and capital — is making the opportunities. People today say, well, gee, these opportunities, and they'll say, but they perform poorly. Yes, the poor performance is what sets the stage for the opportunity —
39:38 the valuation and the pricing is giving you these opportunities because nobody believes that's the case. So there's a line from Bernard Baruch: data and information is no substitute for thinking. And that's the particularly critical thing today, because the underlying economic environment from a world of very low inflation for an extended amount of time, depressed interest rates, low, no, negative interest rates — people got to believe that that was the norm, and it's not. Anybody who graduated and lived in
40:16 that decade-long period — and that's what it is, a decade long, it's not like two or three years, then you'd say no, no, no, you haven't lived long enough, you don't know, you lived a long time, that's the way the world works — and then even people in business, I do think there's been a gravitation that, well, maybe I am wrong, the world has evolved. So I really think it's not only people with 10, 15 years experience that have only lived through one world think that's the norm — everybody else is going to believe that, and
40:38 that's what everybody believes, we're going to go back to that environment again. Therefore that capital stays where it is, because we're going to get back to that. Now I'm saying, no, no, no, that was an anomalous period of time, it's not going to return, and therefore you have to be prepared and invested on who are the economic beneficiaries in the next decade. And they're going to be very different than who were the beneficiaries of an anomalous economic environment. You had a very interesting chart that you showed
41:10 in one of your letters to shareholders called "decade winners," where you show how the world's biggest companies by market cap change from decade to decade. In the 1970s these were energy companies driven by very high oil prices; in the 1980s there were Japanese companies that dominated the global economy; then you show how in the 2000s Chinese companies came to the fore; then in the 2010s companies that benefited from low interest rates and the recovery from the global financial crisis.
41:49 When you think about it in terms of this kind of passing of the baton — these different periods — how does that help to inform your sense that it's really dangerous to have this recency bias where you're like, oh, well, whatever happened in the last decade is bound to continue, because that's what I've seen? Of course it is recency bias, but it's easy to believe it's not recency bias when it's been 10 years. You think, no, no, no, if it was one year that would be recency bias, but I
42:19 have conviction it's not recency bias because it's happened for 10 years. So I'll attribute it to Jim Grant, a line he says — that in science and engineering knowledge is cumulative, and in finance it's cyclical. And given extended cyclical periods, the idea that people forget past performance is not a predictor of future results — what has worked isn't necessarily what's going to work, all the more reason why there are rotations, there are cycles. And that's the phrase I have now — I'm
42:51 stealing the phrase from Clinton when he beat Bush for president, "it's the economy, stupid." What's the economic environment, which companies are going to benefit from the economic environment and therefore do extremely well economically — those are the stocks that are going to perform well. So to think about what companies, what industries are well positioned today, and a combination of well positioned, excellent growth, and have valuations that also are heavily discounted because they
43:25 haven't performed and the conviction is they won't perform, or, I know that business and that business is a cyclical business. Businesses change — that's what I talk about. I talk about not the revenge of the old economy, I talk about the metamorphosis of the old economy. Poor industries that have done poorly for a long time are capital deprived, have consolidated, have restructured, and maybe the underlying economic environment is different where they've gone from being disadvantaged to potentially very advantaged today. And I think
43:57 there are many examples of that pattern — both the poor performance, consolidation, restructuring, and yet the underlying economic environment totally changing now, and therefore being extremely well positioned. So you're looking at quite unfashionable old-economy industries like chemicals and building products and lumber and energy services and the like. Why? What are you seeing there, and maybe you could give us a couple of examples? We're not that specific about stocks, because I prefer these interviews to be fairly
44:29 timeless, but if you could explain how these North American companies like LSB Industries or Westlake illustrate this kind of theme you're seeing, where these old-economy industries that had been largely dismissed by everyone who is excited about Microsoft and Apple and Amazon and Alphabet are suddenly actually extremely attractive, and maybe where the action is. So here we are, bottom-up stock pickers and value investors, as we've always been; but the fact of the matter is, the last two, three, four
45:02 years, I realize that actually I'm in many cases a macro, top-down investor and I'm not a value investor. I'm really looking for businesses that, because of cyclical changes and structural changes, have a significant amount of growth in front of them. So I'm really looking for businesses that have significant growth opportunities and yet valuations that are depressed. Why did that happen, and how did that happen? Economics 101 really does work — capital does get pulled out of things, and therefore
45:34 things are different. The two major themes we think are structural changes that are decade-to-decade-long opportunities that will dictate who the winners are — I don't care who the losers are, I'm not going to short anything. One of them is, anybody who uses the phrase "de-globalization" really just doesn't understand what's happening. What's happening is the evolution of globalization, and
46:01 therefore things change — different countries, companies, industries become advantaged, and that moves over time. We know that if you think back long enough in history. Post World War II there was a period of time where Japan had its recovery and had a significant positive period of time, and then it got to a cost level where the opportunity migrated to South Korea, and South Korea had a significant period of time where it grew and had all these advantages, and then
46:31 over time that moved to China, because China had all these advantages including the scale of the population of the country, so it did really well. And what's been happening in China — so Isaac Schwarz is a young colleague of mine who, when he graduated Wharton back in 2005, took a trip to Asia and thought we need to invest in Asia. I said, Isaac, I'm a kid from Queens, I don't speak English, I'm not going to learn a foreign language,
46:58 how do I invest overseas? But he took me to Thailand in January of '07, which is almost 10 years after the Asia financial crisis — the baht devaluation was a critical element of that — and these stocks were extremely cheap, strong balance sheets, generating free cash flow, paying dividends, 7% dividends. So I didn't have to speak Thai to understand these businesses are substantially discounted, an opportunity. So he got me to invest and think about the world as
47:29 it is. With him I've traveled throughout Asia — we visited 500 public companies over the number of years he lived in Asia. And in that process I remember talking to a Korean company 15 years ago that no longer made garments in South Korea, where they started to do it when South Korea had a lower wage rate than North Korea, because it was competitively advantaged; over time of course it wasn't, so they said, well, let's go make it in China; and they weren't making things in China anymore, they had already gone
47:55 to Bangladesh and Vietnam. So businesses have been gravitating out of China at some point for a long time. That process I think is going to accelerate. So that's why I think it's the evolution of globalization, and the evolution of globalization moves south and it moves west. The next place it's going to is Southeast Asia, with 650 million people, and India, with 1.4 billion people. So there's two billion people that are in the process of replicating
48:15 some of what China did 40 years ago. And that globalization process, in the evolution, means a huge amount of infrastructure should build out, a huge amount of changes, a huge amount of energy consumption, because as you start that economic ladder — Japan, Korea, China — the per capita consumption of energy significantly increases. So you're going to see two billion people in the world start to raise their income level. So I think that's a critical factor. The
48:48 other part of globalization, with evolution, is people say "reshoring," which again is a misnomer. Not reshoring — it is, North America is competitively advantaged in energy-intensive business. So energy, fossil fuels, is something I've invested in 50 years. I think I have a really good understanding as to how those businesses work — not that I know where the commodity price is going to be in six months, I have no idea — but how those
49:18 businesses. North America, because it has an abundance of natural gas that you can't export, has the energy cost that's disconnected from the rest of the world, and that is a persistent long-term advantage. If you're doing something energy-intensive, doing it in North America is a competitively advantaged place. When I got out of college 50 years ago we were competitively disadvantaged; today we're competitively advantaged in a large portion of the world's economy. So
49:49 it's European businesses more than Asian businesses, but also Asian businesses, that are coming to North America to take advantage of that long-dated opportunity for excess profits and returns because of the low-cost environment for energy, which will be persistent. So that's again a critical thing. And therefore, if you are an industrial business in North America, frequently there's three of them left, and there's an oligopoly that has the lowest cost, and therefore it's
50:20 competitively advantaged against the rest of the world because labor is not a big component, it's the inputs. And the inputs in many cases — to the extent that you make a chemical and use the raw materials natural gas and your energy is supplied by either natural gas or lower-cost electricity — you're competitively advantaged. You're going to make ammonia, fertilizers, chemicals in North America; you're going to make steel in North America because you're in the end market that demands it, you got the iron ore that's domestic, you
50:43 got the met coal that's domestic, you got low-cost energy, and you have an industry that produces steel for substantially less CO2 per ton than the rest of the world does. So environmentally we're competitively advantaged also. So these things are very different. That's why I say the metamorphosis of the old economy — these are fundamentally structurally different businesses than they've ever been, in a period of time where activity in North America, given
51:14 things like the Inflation Reduction Act and all of those other advantages as we build out renewables, mean the demand is growing exponentially, and therefore you're extremely well positioned for high growth, and yet valuations are extremely modest because, oh, I know that business is a cyclical business, it changed, it isn't what it used to be — it's a butterfly today, it's not a caterpillar. [course interlude about a stock investing course] So in a way, as you've mentioned
52:36 before, it's analogous to when Buffett looked at something like the railroad industry and said, actually this thing that was always a terrible industry is no longer a terrible industry. That's right. I always joke — 1975 I got out of college — there was a great business called The Wall Street Journal, because there was nowhere across the street from the Wall Street Journal, and I interviewed with a railroad company and said this is a horrible business, capital intensive,
53:01 costs are too high, the thing just loses money like crazy, why would you want to be in it? The fact of the matter is railroads are inherently a monopoly business — to the extent that you have a rail line that goes from this place to that place, you are the low-cost transporter of anything and everything, and no one's going to build a new one of those, so there's a barrier to entry, and therefore you have that advantage. So structurally it was a business that has those positive attributes; and of course today the Wall
53:26 Street Journal is a vanity thing for people who could afford to lose a lot of money and can't make any money anymore. So things change, and people don't have the perspective of, oh, there are cycles, there are things that happen, and what is true today is not necessarily true tomorrow. I remember Bill Miller many years ago — I think when I was following him around back in about 2000, 2001 to write a profile of him for Fortune — said to me the biggest problem in markets is that things change. And it seems
53:54 to me such an interesting thing that in the last few years, even among many value investors, it became almost an orthodoxy that you should own higher-quality companies, and that even the value investors became kind of almost like Nifty Fifty kind of investors. I was wondering how you dealt with that issue, because that did become almost the dominant way to win within your community. So there are two types of value investors in my mind. There's the value investor like me, who owns hard-asset kind of businesses —
54:29 maybe that's also Curtis Jensen, who joined us a number of years ago, Third Avenue, Marty Whitman's firm, a lot of examples of firms that were that — and of course they had the misfortune of being very successful and raising a lot of money, and back in '06, '07, '08, '09 they had billions and billions of dollars, and those businesses then have imploded substantially. There is the other value investor, who was smart enough, who did buy Microsoft when it
54:59 was a cheap stock and it was a value stock, and therefore they had the good fortune not to sell that thing over time too, because they would have truncated their opportunity for profits. So those have grown to be very successful investments that they're kind of stuck in today. So the value guys who performed well are the guys who held onto those stocks and probably have bought in a little bit more to the idea, like, gee, there is maybe better businesses are worthwhile to pay a higher price for. And again, you hear Warren
55:28 Buffett say that, and therefore you apply that to every situation — oh, it's a better business, pay a higher price. When do you start to confuse yourself as to what's a better business, and when do businesses change over time, and it was a better business, but does it change and does it continue to have that? So value investors have gone two different ways. They've either imploded because they bought hard assets and those things have been out of favor — and we're fortunate because we didn't manage a lot of money, and the money we have
55:53 is from people who are really long-term, have been with us for a long time. That's a critical piece — if my capital wasn't aligned with me then I couldn't do what I have done, because they wouldn't have stayed with me through the lean years. And there were definitely a bunch of lean years, to the point where we've done really well the last number of years, and I think we're extremely well positioned today. So those are the two pieces of value investors, and how they've
56:20 changed over time. The ones that have adapted have money, but I think also have valuation issues in their portfolios. So that's why I say it's a stock-picker decade, because even the Nifty — sorry, the Magnificent — I heard Bloomberg the other day say "the Magnificent Six," so they already identified one, and that's what'll happen — it's the same thing that happened with the Nifty Fifty. Some of these businesses are phenomenal businesses, and the reason
56:54 stocks have gone up is because the economics have been strong, so it's not what it was in the dot-com era where the valuations made no sense and the businesses weren't worth anything. These are real businesses that have had significant economic returns and then still some; but some of them won't do well, and I don't know which ones those are, and if you pick the right ones you'll do okay, and if you pick the wrong ones you have clearly valuation risk. When you look at
57:23 investors who've bought into the idea of just owning Microsoft and Apple and Amazon, Alphabet and Meta and Visa and J&J and JP Morgan — these super-successful US companies that benefited from that period of low interest rates and the recovery from the financial crisis — is there something in particular they're forgetting? Not in terms of wagging the finger, but as someone who's been in this business for 50 years, if you could give people some sort of sage
57:56 perspective. Because I think often we look back on periods where it seems obvious in retrospect — why didn't I listen to Howard Marks at the time, why didn't I listen to Buffett at the time? A critical thing is valuation. I regularly quote, in the 2011 letter Buffett made a point of talking
58:28 about, and he referred to Shelby Davis's famous line that bonds were a return-free risk — that was in 2011, that was a long time ago, and for that entire time that didn't come home to roost. But what's my risk-free rate of return? I saw a risk-free rate of return — go back two, three years ago — how do you figure a risk-free rate of return? Because if you figured the 10-year Treasury, the 10-year Treasury was lower than
59:00 what the inflation rate was. So the real return on the 10-year Treasury was negative. So if your risk-free rate of return is negative, and then I got to put the premium on top of that — what's the premium on top of that, and where do I start? So the foundation was in the wrong place, because if nothing else there was no margin of safety in assuming that that was your risk-free rate of return. And yet in real estate, capitalization rates were all predicated on those low returns, so
59:32 the real risks in my mind — I think capital today is substantially misallocated. It's been allocated based on an environment of free money and the presumption that that's the norm. And we talk about public markets, but the other market we haven't specifically referenced is the private market. So private markets, I think there's a huge amount of risk, and more capital goes there and is allocated to private markets, and private markets valuations move
1:00:04 slowly. And what's the right rate of return? The right rate of return is going to be determined by the dog and not the tail. The tail is the Fed, and the dog is inflation. The dog determines interest rates; the tail, the Fed, does not determine interest rates. People think that's the case. If I hear one more time on the radio, four times on TV, "what's the Fed going to do next, are they going to raise rates," I'm like, would you get a life and figure something that
1:00:43 is relevant — because the Fed is going to be forced to respond to what inflation is, and the Fed can't control inflation. So that's the critical element. And valuations — all real estate in my mind has risks of coming down in valuation because cap rates are going to change, because where does inflation moderate out at will determine what the right interest rate is and then we'll fix where capitalization rates are. And the private markets — I recently saw a study Cambridge gave to us, being one
1:01:19 of the things I do is I chair the Pace University endowment, and they said, yeah, the multiples have come down, they went from 10 to 11 to 12 and now they're down to 11 — and I'm like, wait a second, they went from 12 to 11 and interest rates went from one and a half to four and a half, that doesn't seem like the right adjustment, that number's wrong. So I think private markets, which are levered, and real estate, which is levered — the nature of those assets is you always leverage those assets
1:01:51 because they're very leverageable — and if you start to change multiples because inflation is higher and the interest rate is different, your risk-free rate of return is different, and that just takes time because those markets don't reprice quickly. So the risk is not necessarily in the public market so much, even with the higher-valuation stocks; there are these other markets that mark to model and therefore are less volatile. Of course we all know the answer to that is, no, no, no, I invest in a
1:02:21 business that's in the public markets, and the stock price may be volatile, but the risk and volatility in that business is no different than the one that's owned in the private market. So our risks — they're not that dissimilar, and yet one goes like this in price and the other one like this in price, and in a period of time when interest rates have changed radically and therefore discount rates should be changing radically and one's not changing it in structural terms, it feels
1:02:52 like something has really shifted. I'm sure you're seeing a lot, when you're advising endowments and the like, that the people making asset allocations are thinking very differently than you are about the value of indexing and the importance of private markets. What's happened to value investors given the rise of passive investment, the rise of algorithmic trading, the importance of short-term information? What opportunity has that created for people
1:03:29 who actually do care about valuation? The opportunity I think is huge. 2022 was interesting, because one thing that happened that year was both bonds and stocks were down more than 10%, and everybody says, oh, that never happens. And I'm like, whoa, whoa, whoa — when you have one-and-a-half percent 10-year Treasury, and if one-and-a-half then goes to three, what do you think happens to a bond, what do you think happens to a stock? How would you say, who
1:04:02 would have thought that would happen — if you'd thought about it, of course you would think that, and you should have thought about it, because that's the margin of safety. There was no margin of safety. That pricing, that assumption, set the pricing for both of those markets, and then if you change that basic premise, obviously they move. So '22 happened, and bonds and stocks had terrible performance, and somehow people have forgotten that, they've relegated that to, that was a mistake. And the critical element that happened there
1:04:29 was inflation happening — and where did that come from, what caused it, and where of the camp? So one of my colleagues, worked with me many years, has this concept of "grassroots macroeconomics." That's why I said we're a macroeconomic investor; we're not a bottom-up stock picker who thinks we're agnostic on the macro, because when you understand a business and you understand the industry and you understand industrials that are a component of the business and the industry, you understand
1:04:59 the drivers, and we see all these things that are really inflationary. So the globalization and the movement of globalization, when you move to the rest of Southeast Asia and you move to India, it cannot be as efficient as where the Chinese economy is today; yet costs in China are different than where they are today also. So therefore it's not the same place with the same cost structure it had. So I would submit that China — of course that's what's really happened — so again I'll come back
1:05:27 to this concept: I think the Fed at the margin has no ability to influence the really big things in life. And I don't think Volcker cured inflation; I think China cured inflation. Because what we did over 40, 50 years was, industries disappeared in the rest of the world and they all moved to China, because China had all these cost advantages and could do these things and make all these things for much less than we could. And what that did was, we bought stuff for the same thing we paid 20, 30
1:05:55 years earlier, therefore inflation was sucked out. So it wasn't, as Ross Perot said, the giant sucking sound was in Mexico stealing things from North America in 1992; giant sucking sound's been going on for 40, 50 years, and it's moved to China because they could
1:06:10 do everything cheaply. But the costs in China now have risen, because now they've become a net importer. So when it comes to making steel, suddenly there's risk of being the high-cost producer, because they have to import iron ore, they have to increase met coal, they have to increase energy — so the critical variable costs, they're high in the cost curve. Labor is a small component of making steel, not a labor-intensive business, who cares, you got cheaper labor. So
1:06:39 when they started that process they had all of those things internally and they were advantaged, they had an end market that had the demand, and they could supply everything internally; now they've got to import all these things, and then the high-cost import. So that's a radically different place. So I think China is at least done and probably feeds inflation, and as you move someplace it can't be as efficient — when Apple thinks about, okay, we're going to set up
1:07:06 a line in India, it's going to be higher cost than what it is in China, you can't replicate the efficiency that you have, the scale that you have. So I think — and then the other thing is energy. We've been fossil fuel investors from day one. Energy transition is obviously something that's going to continue to accelerate, and energy transition is going to be something that is going to be inflationary, because the buildout of the infrastructure that you need calls on materials that are already in tight supply, mean all those material inputs are going to
1:07:34 cost more money. So you're going to have recurring commodity cost pressures as you build out. When you build out renewables you need steel, cement, and all these basic materials that are in tight supply today. So we think inflationary situations — and energy too is the same thing, those are inflationary — and therefore inflation is going to be more persistent at the higher level. And when Financial Brigadoon happens, people give up — that's not going back to Brigadoon, and interest rates adjust to the right rate
1:08:08 where inflation levels out, which is either going to be at higher or potentially reasonably higher than where we are today. And people will give up and say it's not going back, and I can't invest based on the hope that we're going back to a two, two-and-a-half percent inflation rate, because that's a hope that seems to me to be hard to get the genie back in the bottle. Therefore you're not going back to that rate, and therefore you have to reprice what you own based on that risk-free rate of return, the risk associated with that investment, especially
1:08:39 if there's incremental inflation that's going to affect your system. I wanted to focus a little more on energy, because it's obviously a hugely important area for you. I was looking at, I think it was the April 30th 2024 statement for Ravenswood Investment Company, which is a limited partnership you've run with great success for decades, and if I was reading it right you had something like 62% of the portfolio in energy holdings. So it's a massive area for you, and you've also, as you mentioned, been investing in energy since
1:09:16 the '70s — you're putting your money where your mouth is. When you look at this huge structural trend in energy, can you explain why there's such a massive overweighting in energy in your portfolio, but also how companies like Tidewater or TechnipFMC or Subsea 7 — or whatever other big positions you choose to mention — illustrate your way of positioning yourself to take advantage of what you see happening in the world of energy over the coming years? It's individual stock selection. I'm not buying energy
1:09:57 broadly and its valuation. It's easy, it's simple, it's really not that complicated. The valuation part is, in certain parts of the oil and gas industry — the service parts of the business, the picks-and-shovels parts of it — there's what I would say a true north. The true north is what's the replacement cost of that asset. And it's predicated on the concept that that asset will be one that will be in supply-demand balance or in tight
1:10:28 supply, and therefore that means the economics will be determined by what it costs to build that asset, because you're going to need more assets. So where is that, and that shows you the earnings potential of the business, and that shows you the value of that business. What's happened of course is the focus of what I do in energy, a lot of it really does tend to be offshore-related, in service, picks and shovels. So in 2017 energy had a really good run, but it
1:11:04 was all onshore, it was all shale, and I did nothing in those years and I did not participate in it. So again, it's stock selection, and in that case I underperformed because I didn't own the right energy stocks. What's happened more recently is, oh no, no, the onshore has its place, the offshore has its place, and that place has finally come to what the underlying economics are, what the opportunity set is with size and scale opportunity. So it is the realization of something
1:11:35 that I've invested in all along, that the market couldn't care less about four years ago. When I go through the litany of really smart value investors who do cyclical energy kind of investment — it is the kind of thing they would invest in, it's not like, oh, I don't invest in that thing. No, this is them saying, no, no, no, I have no interest in that. And in the meantime Tidewater — it's boats. A year ago I was at a conference and I said, okay, the stock pick I'm going to
1:12:03 have today, I'm going to talk to you about a real estate company. And the real estate company is one in which the real estate's been converted, shut down, ripped down, there's no new supply, the demand for that real estate has suddenly come into tight supply, you have 90% utilization, and therefore the rental rates going through the roof. As the rental rate goes through the roof, it all falls to the bottom line, and therefore the value of that is — well, when you get to the point where you need to build new real estate, what's the cost of
1:12:35 that real estate? And that's a pretty easy number to identify, and if I can buy something for ten that cost 50, then I'm buying it for 20% of its replacement cost. Now, when do the economics get it to the point where it's worth 50? That's the uncertainty that people aren't willing to invest in, because I don't believe it, I don't know when it's going to happen. In the meantime we invest in it because I have a strong conviction that it's not that long a time horizon, and when I
1:13:03 start at 10 and then I'm going to 50, that's a really good return, so the concern becomes less significant. And now the company disappoints — I'm holding up my hands, I got one high, I got one low — and what happens is, as it disappoints, which inevitably will because the situation is not conducive to the supply-demand, this is the only place for the stock to go, goes down, doesn't matter that you're buying a dollar for 20 cents, it goes to 10 cents, and if it continues to disappoint it
1:13:31 goes to five cents. So the opportunity gets larger and larger, and probably the opportunity gets closer to realization, because the timeline is changing because the supply is dwindling, and therefore the demand returning is an uncertainty. So we look at these businesses and understand in certain cases that disparity, and therefore continue to invest as that opportunity potentially gets wider as it doesn't happen in the short term. So that's where we've made the most money.
1:14:00 In the short term it worked against us, and we invested more money when the opportunity became closer to realization and the valuation further discounted. So you look in a fairly granular way at a company like Tidewater, that's been a huge investment for you, and you say, okay, these guys have 200 and something vessels, these are all these crew boats and tugboats that are used to service global offshore energy companies that are exploring, producing — and then you're like, how much would it actually cost to
1:14:28 replace these vessels, and then who the hell wants to invest in servicing energy exploration and production companies offshore given the kind of ESG concerns? So is that the sort of analysis you're doing here? It is. And that's what happened — I was down in New Orleans, we went on a field trip to go see Methanex, that owns methanol plants, they were relocating a methanol plant from Chile to the Geismar, Louisiana. So it was a field trip to Geismar, and
1:15:02 we're in New Orleans, as long as I'm there, who else to visit with? And I said, ah, Tidewater, I hate the boat business, but I had nothing to do, so I went to go see Jeff Platt, CEO of Tidewater, and had looked at it and said, hey, maybe it's different than what I thought. What they've done with the fleet, they've upgraded the fleet, it's newer, but it's still problematic. So initially I didn't even want to invest in it, because I've
1:15:30 been around the business 50 years, so it's not a business that inherently pulled me in. But of course it was — wait a second, now suddenly it's gone through bankruptcy, and I have a balance sheet with no net debt, I have a positioned company that's breaking even at the bottom of the cycle, and I can buy
1:15:47 assets for 20 cents on a dollar — this is going to make really good returns. And the other thing I've learned from investing in businesses that have no identifiable earning stream — and therefore the assets are hard to value, and therefore you can buy them for far less than what it would be to build those assets — is, as the thesis ends up being right and the supply-demand comes in balance and things start to manifest, when the stock doubles it's probably a better buy than where it was when it didn't,
1:16:17 because what's happening is the supply and demand has come and right-sided, the economics are now starting to manifest, the earnings will be there, the valuation, replacement cost, becomes relevant, and the identical timeline suddenly now appears. So therefore, to put more capital to work even though it's appreciated — that's what we've done in Tidewater over the last couple years at various points, I continued to add at higher prices because the value was still substantially discounted. So when it got to 30 cents on a
1:16:48 dollar and I can now identify that in the next two to three years it was going to a dollar, the opportunity now was ripe, and therefore to put capital to work. And as a result you end up having a really big investment in something that is really the right — I guess Munger has the phrase that there are very few things in life that really work out well, and when you have one of those you take full advantage of it. So when these things manifest and the opportunity
1:17:19 then comes to fruition, the investment thesis we had now manifests, there's an opportunity to put capital to work at a really great risk opportunity. I was looking at Tidewater recently, it looked like you had over $300 million in the company, is that about right? I have a big investment in Tidewater, yes. Now, to be told, if you do look through my public filing you could see in the last month I have sold some stock. And so in spite of the fact that I say when I
1:17:53 come investing it's really more predicated on a price-the-value equation, it's not necessarily on putting together a portfolio and portfolio risk and sector allocations and all that — I'm not looking to offer you a diversified investment portfolio, I'm looking to identify situations where the price, the value are substantially mispriced and therefore there's a great opportunity. You have to figure out how to allocate your own capital that you've got in different pockets, but I'm not looking to do
1:18:20 that, I'm not looking to replicate that. Instead I'm looking to identify things that I think there's a huge investment opportunity in, and put my own capital and yours alongside me to work on those things. And we're not really proposing any of the — well, I'm not, anyway — using this podcast as a way to propose buying particular individual stocks. It's more to illustrate Bob's way of thinking about businesses and about how to invest and where to find opportunities, and taking advantage of some of these bigger
1:18:52 trends that we're seeing. One of the trends you've been talking about a lot — you quoted the head of the International Energy Agency saying that we're in the first truly global energy crisis. As someone who's invested in this area for 50 years, can you give us a sense of what that actually means, what we're seeing in terms of demand not only for fossil fuels but for renewables? Having invested in energy — the first thing is, I'm still in college in the '70s, but in 1974 I went down to New Orleans for Mardi Gras, and on the way
1:19:33 down we almost didn't make it because there was gasoline rationing, odd and even. So '73 was the first event that happened, when oil went in six months from 3 to 12, and I lived through that experience, and that decade — that's what we said, these stocks that performed were energy stocks, oil stocks, because they owned an asset that was in high demand, they had high profit, therefore money follows profits. So they didn't buy oil stocks
1:20:03 because they wanted to own oil stocks, they owned oil stocks because they were making a lot of money, and that's where the capital went to. What happened then in 1979, the Shah falls in Iran, so you've got a second event, and oil ends up going to 40 — it started at three at the beginning of the decade, it's now at 40. But of course there was a supply response, and places like Mexico, North Sea, all these new places were economic, and therefore new production came online,
1:20:27 supply came online, so the supply-demand balance was met. And actually the Shah's fall in '79 exacerbated the problem, because the price went even higher even though the world could, with the production it had, easily supply the demand — demand was waning because the price was high. So then you have a period of time in the mid-'80s where the world could produce 75 million barrels a day and it consumed 55 million barrels a day — 20 million barrel
1:21:00 excess. And over time, where we are today is, we now consume 100 million barrels a day, and the excess supply I don't think is more than two or three million barrels. So never have you had anywhere near that tight of supply. We've been fortunate the last three, four years you really haven't seen the impact of the fact that if you lost 5 million barrels of oil, I don't know what we do, because it just isn't there. And again I emphasize, I thought a year and
1:21:31 a half ago, when the Saudis first announced their ramp-up in spending, they said we're going to increase spending 60% and hold that for five years, and at the end of five years we're going to go from 12 million barrels a day to 13 million barrels a day. Well, how do you not interpret that to be — Saudi Arabia is a place where it's a mature oil field. When you spend money that aggressively and you don't move the meter, you're on a treadmill and you're running awful hard.
1:21:56 So not only is that tight supply-demand really tight, the rest of the world probably thinks of Saudis, oh, they can increase production, no — huge numbers, they can't. So we're at a very
1:22:05 tight supply-demand balance in oil today, which I don't think is recognized at all in pricing, and yet is an important backdrop. The other thing is the still-increasing demand for energy. As much as the concern about the environment, you'd rather not have the case — natural gas
1:22:26 including the bridge fuel that will facilitate how quickly we can build out renewables to be able to supply enough energy from renewables or battery storage or all of those things, which will take cement, steel, and all kinds of materials and copper. Therefore the buildout — that's what I say, the buildout of renewables has a really high cost of energy, of materials consumption, materials that are already in tight supply. So in
1:22:58 our mind, I just can't see how 10 years from now the demand for copper is substantially larger than our ability to produce copper. So that's an inevitability. Now, when that happens and how that happens and how it plays out, I don't know the answer to that. But if we're electrifying
1:23:09 everything and we want to do all these things, if we want to have all these renewables and we want to have EVs, you got to have a whole bunch more copper than we produce today. And you see that, because that's what's going on in the copper markets — the people in the business identify the coming short supply, and they're buying each other. So I don't want to start a new mine, because the timeline on that is very expensive, uncertain, and the economics today don't necessarily justify it, but I can't turn it on a dime,
1:23:41 and so in the meantime I want to buy the guy who has the copper, so I supplement it. So BHP is bidding to buy Anglo — it was not efficiencies, synergies, or anything else, it's like, I want to own more copper, how do I do that, I buy a big copper producer. So we
1:23:59 think the call on materials is a really interesting opportunity for long-dated investments today. That's probably not the question you started with. No, it's an interesting and important point that you make. And just to clarify, in one of your shareholder
1:24:15 letters you said that electric vehicles need four times the amount of copper as a gasoline car, and likewise things like wind turbines consume lots of copper. So part of what we're dealing with is this tremendous demand for lots of different materials — steel and copper and nickel and lithium and cobalt and all of these things. So there's increasing demand for all of these scarce natural resources, and then at the same time there's mounting pressure to protect the environment. I wonder if you could put
1:24:48 that in a sort of mature, reasonable context, because I think there's so much ignorance and dogma when it comes to these questions of the environment versus fossil fuels. As someone who's really having to position yourself so that you're able to navigate this tension between environmental needs and economic realities, how do you think about this whole question? Yeah, it's inflationary. Last September I was down in Chile, and Finning is the
1:25:33 largest caterpillar dealer in the world, and they had a field trip, and we spent three days with them going to their facilities, and at the end of it we actually went to an open-pit copper mine. And the scale of these things that we all have no appreciation for — you have a copper thing at home, you don't think much of it. So first off, I'm sure everyone's seen a picture of one of those large caterpillar dump trucks that holds 100 tons — the wheels are eight feet high
1:26:02 and each one of them cost $250,000, the truck's just a behemoth, and you stand next to it, it's 40 feet high, oh my God. Then you go to the open-pit mine and you see 50 of them like little ants running around the mine, and they get loaded up with rock, and now they have to go up to serpentine hill to get to the top of the mine, and they move at a pace of about 2 miles an hour, burning huge amounts of energy, diesel, to be able to move that rock to get to the point, and then eventually you take that rock and you process it and you come up with 20 or 30%
1:26:41 copper, and then you ship that to China probably, who then refines it to make 99% copper, who then ships it to someone else who then incorporates copper into their wire or whatever else. So the scale and the interrelationship of this, and the role of China in that process, is amazing. At the same time, for the copper mine, when I'm talking to them, they say, yeah, we have this copper mine and we're doing this expansion, and fortunately we have a water desalination program, because you can't use groundwater anymore, and desalinated
1:27:15 water is 10 times the cost of groundwater, and it also means the energy consumption is 33% higher for the operation because of the desalination. And because we have the desalination, there's a guy who has a copper discovery not far from us, and he thinks he's going to develop that copper mine — he's never going to be able to do that, because he doesn't have the infrastructure, he doesn't have the desalination capacity. So the fact that we have all those things, but it's going to cost us more money. And then lithium, which is another
1:27:47 big product that comes from Chile — the Government of Chile says any new lithium project, we're going to own part of the economics in that project. And Indonesia and Freeport-McMoRan — the copper discovery that they have in development, they were planning on taking the copper someplace else to have refined, Indonesia said, no, no, no, you're going to build a smelter here in Indonesia, we're going to capture more value in that process, and therefore you're not just going to take that mineral and run away with it. So we're
1:28:17 going to take the second bite at that apple and we build that our economy. So what I think is, the demand for incremental new resource — these countries are in a different position than they were 50 years ago, when you came in, you paid them some money, and you ran away. No, no, no. So what's the environmental impact, you're going to have to do things that are going to minimize the environmental impact, which means a lot more money and a lot longer time to develop these materials that are going to go in. So life is a trade-off.
1:28:47 It's not like you do this thing and it's only good; it's kind of like you do this thing and it's good but you got to do this to get that. So I think we're ignoring the idea that you got to do this to get that, and therefore there's an extra process involved, an extra burden on the environment, an extra concern about that, and that's going to be mitigated in some way and that's going to cost you more money. So it clearly is. And now of course I'm a Pollyanna, I see how everything
1:29:16 works out well in my mind — it's really good, because one of the arguments in the last two, three, four years is the south is short of resources and money and the north's got all these advantages. Well, the northern part of the hemisphere is going to need all the stuff that's in the southern part of the hemisphere, and the southern part of the hemisphere is going to say that's fine, but these are the conditions in which you will take that resource from me, and this is what I want in return. And so I think that's
1:29:44 really good, because that means that value and that economics start to float to parts of the world that have had more difficulty, haven't been able to capture the value of what they own, and what they own today is in very high demand and increasing demand, and the value capture is going to be significant. And that means in the process it's going to cost a lot more money to do the things we need to do to build out renewables. You mentioned this trip you took to Chile, and I think you
1:30:15 were away for about a month going to Chile and Norway and Dubai and Turkey and the like, and when you came back one of the things you wrote about was your increased conviction that the US is structurally advantaged for years to come. Can you talk about that, because for a lot of people who've been thinking for all these years that it's time for the revenge of foreign investments, and that finally that will come good, what you're saying seems to be, no, actually you really want to focus pretty heavily on the US.
1:30:45 Well, I actually think both of those are true, because I just went through an example where resource and materials are in the south, and those are emerging markets, so I do think emerging markets are going to have an emergence, and they are the beneficiaries to the continued movement, evolution of globalization out of China. So I think emerging markets have really good growth in front of them, because they're going to pick up some of that advantage from the movement out of China, at the same time the appetite for
1:31:14 materials are going to be things that also do well for them. At the same time, if we're in North America and we have really low-cost energy and we have that huge advantage, that means we're building out all this infrastructure, building out all this industrial capacity, and therefore North America will do well in that process too. And of course a place that's, I think, substantially at risk is Europe, because Europe is more focused also on the environment, and
1:31:43 decarbonization in many ways is de-industrialization, and therefore the movement of industry from Europe to America is definitely something that will continue to accelerate, and that creates a headwind. There's probably other opportunities in Europe too, I wouldn't be so sanguine that things look really bad there. So I actually see a world in which yes, North American markets — and I can't help but think there's a whole bunch of positives that end up being for
1:32:12 America. Now, at the same time we have a whole bunch of debt that has not come home to roost and that continues to grow, so there is a cloud out there too — it's not just sunny clear skies ahead. And again, that's probably more like, do you pick the right industry, do you pick the right company, because in spite of the fact that America may have other structural issues, these industries are going to be competitively advantaged and probably have pricing power, and
1:32:41 therefore have growth and therefore good economics and start out with low valuations too. So part of what you've been doing, as we mentioned very briefly before, is investing in these chemical products companies like LSB Industries that are in ammonia and the like — these companies that in some way embody the competitive advantage of old-style US industrial businesses. Is that fair to say? Well, it is, but I'm looking for more, I'm
1:33:19 greedy, I tell you, I'm greedy. So LSB, what they do is, in large part they make fertilizers — cyclical business depending on crop prices and all those things. However, to make that they make ammonia, so this is part of the energy transition. Energy transition is something that is real, will continue to gain momentum, and will call on capital, and part of that process — that call on resources — means that's an interesting dynamic. But ammonia is interesting from the point of
1:33:53 view that it has a couple, three different roles that logically in the next decade could now have a huge increase in demand. The first one is as a marine fuel. So shipping is a huge impact, a big carbon output, and
1:34:13 therefore they're trying to figure out how to convert engines to burn something other than something that creates CO2. There are two identifiable options for that: one is methanol, and the other is ammonia. So by burning ammonia — when you burn ammonia you don't produce any CO2, you produce other pollutants but you don't produce CO2. So there's a movement afoot, there's plenty of companies who have identified
1:34:46 engine capacity to burn ammonia as a substitute. There's also, in Asia, they're doing test burns now to substitute in with coal ammonia, because again when the ammonia is burned you don't have the CO2, you don't have the other output, noxious things that come out of burning coal. So Japan and South Korea are testing that process, and that could be a
1:35:04 huge market for incremental ammonia demand. And then the third use of ammonia is, it's really hard to move hydrogen, and hydrogen is kind of one of the holy grails of energy transition — if we can get to use hydrogen. But hydrogen is hard to store, hard to transport; ammonia is not as hard, it's still got its own issues but not as hard, and therefore you can transport ammonia and convert it to hydrogen, so
1:35:21 it's a bridge fuel to be able to use hydrogen. So these new uses are there. That's what I really think over the next three, four, five years — the end-market demand for the intermediate product they make, ammonia, is going to be substantially higher, so there's substantial growth with energy transition. So not only does it have the attributes of the positive
1:35:53 situation where you're going to make ammonia, you make it here in the US, natural gas prices are 2 to 3 instead of nine, or when they were 60 they were nine here, so you get this huge pricing differential, and that's your raw material input, so you make it for less. The pricing is set by the European or Asian producers, so that's the pricing power — their cost structure is such they make a margin on it, the North American producers
1:36:22 make huge margin on that, and that's a sustainable advantage because our energy costs are lower than there. So the fundamental business as is, I think, is one in which there's substantial growth in terms of profitability in the business, because you're in the right place producing with a low-cost structure, really cost advantaged. But the other thing is, there's also end-market demand for use of the intermediate product they make in new uses
1:36:31 that aren't there. So huge growth opportunities, and as a result, further, ammonia becomes part of the equation potentially. So you have seen ExxonMobil buy Denbury Energy, and Denbury
1:36:55 owns a CO2 pipeline that moves CO2 for carbon sequestration purposes, and so that's why they get into the business, so they're going to be advancing carbon sequestration because they own the CO2 pipeline. So Exxon is looking at, okay, we're not just an oil and gas company, that energy transition is going to put us into CO2 capture in part business; ammonia looks like it's part of the business too. So is there that
1:37:27 kind of logic where the integration — ammonia companies become something very different and an opportunity for large oil companies to be part of their portfolio of energy and energy solutions? It seems like a nice example
1:37:37 of what you do, where you're looking at a market that's become kind of consolidated and that's transformed, and a stock that's cheap, and something that's off most people's radar and aligned with these big macro forces like the US strength in low-cost energy. It feels like it embodies a lot of what
1:38:04 you do. We think there's a lot of ways to win, and there's an entry point of low valuation too. So when I asked people on X, formerly known as Twitter, whether they had thoughts about questions I should ask you, one of the questions I liked most was from Joe Costa, who has this terrific aggregation service where he curates lots of the best resources on value investing, and he wrote to me, one of the things that always strikes me about Bob is how kind he is and how
1:38:40 he exemplifies what Adam Grant calls a giver. From what I've seen this is pretty widespread among both younger professionals and college students who come in contact with him, so I'd love to hear him discuss his views on giving back via his time and knowledge to young generations and why it seems to be so important to him. And when I looked at the philanthropic stuff that you and your wife Suzanne have done over the years, it's really striking to me how much is related to kids and education. I wonder if you could
1:39:10 just talk a little bit about that. Well, first off, full disclosure, I know Joe, and I know Joe well, so this is a question from a friendly person too, he's throwing me the fat softball here, let's see if I can at least get a ground ball. I think it's really interesting, and of course it's
1:39:44 fulfilling for me. My experience, like when Isaac graduated college and said we should invest in Asia, I said okay, let me go try that, so I would go with him, and I ended up for the next six years doing all these trips to Asia visiting all these companies, and the information that you get — as Friedman said, the world's flat. That's why I say it's not de-globalization, it's just the evolution of globalization, it continues to move places. So my appreciation for that was colored by the fact that I
1:40:15 listened to Isaac and said, okay, let me humor him, maybe I learn something, and of course I learned a lot. So in the process of talking to people you do learn a lot, because they ask different questions, they go different ways, they do different things, so there's a value to that. And there's also value in terms of giving someone who's hardworking and is looking to figure out how to advance their situations in life, be able to help them in that process, because opportunities are
1:40:42 somewhat limited. So to the extent that you give opportunities to people who are anxious to do things to improve, clearly that does something, and there's value to it. It may all go back a little bit to when I was in sixth grade, seventh grade — I went to Catholic school, and the nuns used to raise money for the people in someplace in Central America, and there was a competition they would set up. There were 46 kids in our class, half girls,
1:41:14 half boys, and they said, okay, who's going to give more money, the girls or the boys? And Marie Napolitano used to always give money and I used to give money, so there was a competition they set up between us. And at the end of the day, my family came from a modest neighborhood, but we actually had reasonable money, so when I describe my situation growing up — there's nine of us in the house and only one bathroom — and someone said to me, oh, so that's why you're successful, because
1:41:41 you're driven, because you were in a difficult environment. I said, no, I love my childhood, was wonderful, because we had more than most. The idea that I could share that with people made me feel really good. That's lovely. And I saw, I think you got a lifetime achievement award from Pace, the college where you went, and they referenced that seventh grade competition and said it kind of combined the joy of winning with the joy of giving to those who had
1:42:21 greater needs than us. They were quoting you, talking about kids in Central America needing food while I really didn't need that extra pack of baseball cards. It seemed also that one thing that was very powerful for you about giving to Pace was the fact that, as you put it, a lot of the people came from these immigrant backgrounds, so it was more obvious that you were really benefiting people who, in some ways not dissimilar to your grandparents' story —
1:42:53 your grandparents coming from Italy and having to make a life here. And of course my college is Bucknell, and I do give money to Bucknell, because Bucknell did give me a loan and some money when I was there, so I owe them. And of course everybody owes money to schools they go to, because the reality is, when you get charged for tuition, it's less than what it cost to educate you, so there really is a gap that you've been the beneficiary of. But Bucknell also is a place that has a
1:43:20 bigger endowment and educates generally people from higher socioeconomic background, as opposed to Pace — it's a different input group. The people who go to Bucknell probably will do whatever they're going to do in life anyway, you don't change the direction of that too much. The fact of the matter is people go to Pace and then get a college education, potentially you have impact. And Pace is a place that has harder numbers in terms of what's the graduation rate,
1:43:48 and isn't as good as other universities — of course you start with a population that's more disadvantaged, so the likelihood that you're going to come up with the same graduation rate Harvard's going to come up with, of course you're not, because that group inherently has all these advantages they come in with. That's not the situation with Pace. So that's why I'm much more active doing more to Pace, because it really
1:44:09 changes people's lives and has impact, as opposed to, yeah, now our endowment's bigger than Colgate's, and that's one-upmanship. So another great rabbit hole I fell down over the last couple of days while researching you, was I was studying this amazing nonprofit that your wife Suzanne runs and that you've been very involved in helping to fund, which is called Med
1:44:39 Shadow, and it's really kind of important and impressive. I wondered if you could give us a sense of what it is and what motivated her to do it, because it's an amazing story of how she turned a very difficult situation into something
1:44:53 where she's really had a profound impact. She's had personal experiences that put her in the position to think about this issue in many different ways, and therefore to have the ability to have impact on it and potentially change things is critical and positive,
1:45:14 and that's what we're here for, if we can do good things in the process. So it's pharmaceuticals — I think it's number four, five in terms of largest causes of death
1:45:25 in Americans, and that's not misuse of drugs, those are prescription pharmaceuticals, that's not the heroin that you got on the corner that you had an overdose and die. So it is a problem, and therefore thinking about — we
1:45:41 live in a world in which we're looking for the easy way out, and that's what, post the financial crisis, the government decided the easy way out was, I make interest rates zero and therefore I'll help everybody. Instead it's effectively the
1:45:53 same as my wife's situation: well, you kept giving them medicine, get them off the medicine, they need to get up, they need to exercise, diet and exercise are really the solution to many things. And yet there's times when you need medicine,
1:46:05 so you need to do that, but you need to be cognizant of, what's the side effect of those things, especially as you get older, there's multiple medicines that you're taking, and the impact of those and how they interrelate is complicated. But of course her situation is different — her mother took a drug that caused her infertility, so it's a
1:46:31 critical part of her life. And then when our nephew came to live with us when he was 12, he didn't come because, you see the ideal child who's a precocious 12-year-old; precocious 12-year-olds in a Catholic school don't necessarily jive, and suddenly, well, Ritalin is the thing for him. So my wife went to go see the doctor and talked about Ritalin and said, well, what are the side effects, and they said, oh, there's no side
1:46:50 effects, if there were we would know. And she didn't feel very comfortable with that as an answer — he's a precocious child, we're going to give him a drug, he's going to be on it for an indefinite amount of time, that has to have some kind of impact. So he didn't go on the drug; fortunately we were able to give more money to the school and they said, okay, he doesn't need to go on the drug. So she had that experience too, with Dan, when he came to live with us. So there's another experience that she's had, and from Med Shadow she's done other
1:47:17 things too — she's involved with the FDA, she's actually on advisory committees and is regularly called down as the drug-safety component on hearings with new drug applications, in terms of what are the side effects, what are the medicine, should we approve this, how does it work. So she has that kind of input and an additional value that I think she derives from that process, because all these things we do we get benefit from — this is just give things away, we see things, we hear things, and we have appreciation for things and
1:47:50 we learn stuff. So there's a lot of learning from that process, and learning those things is critical, important, and potentially makes us better contributing, and the world not so bad. I listened to her on a podcast yesterday talking about lifestyle choices to deal with diabetes or pre-diabetes, and she's a very remarkable woman. I wanted to sort of honor her — she took
1:48:30 this very difficult situation where her mother had been given this medicine DES, that was kind of like a synthetic estrogen drug that was supposed to help people avoid miscarriages but ended up having tremendous side effects for millions and millions of Americans, and she's turned it into this amazing thing — there's this nonprofit Med Shadow, which focuses on this idea that meds have this shadow that follows you around. So it's not nihilistic in any way or hokey, it's like saying, no, you
1:49:00 need to understand the side effects so that you can make sensible decisions. So I think it's a really important subject as we look at things like Ozempic and stuff like that, which I keep thinking, God, should I just one day give up on controlling my diet and take an Ozempic. So she's great at highlighting that, and as you say she became the lone consumer representative on this FDA advisory committee on drug safety and risk management, an extraordinarily important role. So
1:49:30 this made me think — you mentioned right at the start of the conversation, talking about how your father dealt with a loss of eyesight, and you've seen your wife Suzanne deal incredibly with the challenges she had with infertility and with your nephew. I'm wondering what perspective that's given you on how to deal with adversity, on how to deal wisely in the course of a long life with the things that don't go our way. So it's amazing —
1:50:06 I always realized that I'm not as introspective a person as I really should be. For example, my dad — we never really appreciated the fact that his eyesight was so impaired. Now my mother was a critical element in making that less transparent to all of us, so we were in many ways almost sheltered while we lived with him, that he had these issues, so we really kind of didn't see it. And there's my shortcoming, they didn't
1:50:47 delve into it, say, Dad, what are these things and how do they really affect your life. So I always regret today that they didn't have those conversations. So to a certain extent, and there hasn't been great adversity in our lives — I'd say we've been amazingly fortunate in so many ways — and therefore occasionally there's a little bit of a wrinkle here and there, so yeah, deal with that. Those are opportunities. As I
1:51:14 joked when my nephew came to live with us when he was 12, I said, Sue, this is perfect, he's already had some issues here, so it's a win-win for us — either he's got some issues and that's difficult and we can say, well, it wasn't us; and if it turns out okay, take credit. So when you look back on your own life and think about how successful you've been since you got that C in your accounting major, how obvious is it that there were certain qualities
1:51:50 you had that helped you succeed? I remember Mario Gabelli talking about you and using his phrase about PhDs — that he always looked for people who were poor, hungry, and driven. He changed in your case from poor to passionate, and you've talked about passion as the thing you look for when you're hiring. When you look back, what do you think enabled you to outperform,
1:52:23 that's kind of clonable for the rest of us? The successes we've had have been the ability — the behavioral advantage of being able to tolerate a loss. So one of the famous things in value investing psychology is the concept that losing hurts twice as much as winning, or whatever the two-times,
1:52:41 three-times differential. The fact of the matter is, losing money doesn't bother me and hasn't bothered me, somehow. So the opportunity of being right, which is making money — but it's not necessarily making money, it's really more like being right. So looking at things and getting a differentiated view and supporting that and coming to conclusions that are different than others is a great
1:53:13 puzzle, so it's a personal pursuit that happens to bring along with it a bunch of money — you can do it right too, so that's the outcome of it. But I don't do it for the money, I do it for the enjoyment of it and the fun in the process. If I lose money in the meantime, of course I have other people's money I'm losing too, and that is difficult, but I've been fortunate they stay with me, so at the end
1:53:46 of the day there's a mark-to-market, but there's not a loss in it. So it's worked out well, and the ability to tolerate disappointments with the idea, well, wait a second, is the idea, the concept and the investment thesis still there, is it still correct, and if
1:53:53 I'm right, now the fact that I was wrong it'll be even better. So those psychological things have been critical in terms of being able to stay with investments and things that over time have worked out extremely well, because we bought them for a fraction of what those things were. As I see it, there's a kind of emotional and psychological fortitude that's been really key to you, but it's also combined with the fact that you got
1:54:22 very lucky very early on in getting these really robust principles from that Graham school of investing, and you had this essential thing, which is that you actually had the technical tools from your accounting background — you knew how to value stuff. So when you were losing money on something you could actually see what it was worth, you had something to hold onto. Which reminds me of Joel Greenblatt saying to me at one point, most people just should be indexing or outsourcing to someone
1:54:52 else, because they just don't actually have the tools to analyze something, to know what a business is even worth. Again, the good fortune that I happened to fall into that job, because I did get the seed that I thought I was going to get the opportunity — at the time those things were random and good fortune, that's all that was. I could have been someplace else, I could have worked hard at Bucknell and got an A and got a job for a big accounting firm and be on a very
1:55:23 different path today. Another critical piece of the success has been the fact that, when my wife and I married, she had a reasonably good job, and I didn't make money in the business first 10 years at all, but we didn't spend money, so we had a very modest life in terms of how much we spent. So I could work for a year, 10 years in, and not really make much money, and most people don't have that capability and capacity. So
1:55:53 there are so many things that have happened in my life that have been good fortune. Do you feel in some way like you've been taken care of, or do you feel like — I had this discussion with Bill Miller over dinner a few weeks ago, and I said, do you feel when you look back like you wound up at Legg Mason with a particularly great mentor, do you feel like it was luck or you were being taken care of in some way by a greater force? And he
1:56:23 sort of thought about it and said something about, well, according to probability there has to be a luckiest person and an unluckiest person, and his wife was sort of like, no, I tend to agree with you William that maybe there was something more going on. And I wondered how you — just your personal temperamental or philosophical or spiritual views — whether you feel in some way like it was all just random, or whether you were kind of somehow blessed by this
1:56:52 whole process. I've been blessed by the people that I've known. That's been a huge gift. I look back, it was amazing — when I looked back on your career, even your professor Mr. Pelosi — if you removed one piece of the puzzle, Anthony Pelosi the professor back at Pace, if you removed one piece, the path could have been totally different. Well, that's the way life is, right — all these things,
1:57:30 one change would have been a different course in life. Had I married a different person — and one of the things is that we couldn't have children,
1:57:34 so the fact that we didn't have children, that's expensive, so to be able to not make money for 10 years and to have children, that's a very different economic equation. So my ability to have persisted would have been very difficult if not impossible. So each one of those things is a random thing that all comes together that makes the outcome where you end up. And there
1:58:00 are other outcomes that probably would have been a good outcome too, but they would have been different outcomes for sure. Yeah, it's kind of humbling, it fills you with a sense of wonder at just the complexity of it. Anyway, that's a lovely note on which to end. I really enjoyed chatting with you, and I was amazed as I looked back on your career at just how remarkable your results have been over a very long period, and
1:58:29 so I'm happy to have people pay attention to you, because I don't feel people have quite realized how extraordinary it is what you've achieved, and you've done it in a quiet, low-key way without any bombast or
1:58:39 bravado or show. So it's been a pleasure to get to chat with you, William. It's been great to have a conversation and just chat, it was a very relaxed environment, and thank you so much, I enjoyed it, and I hope people weren't too bored by the conversation. No, it's fascinating. And
1:58:57 next time we'll do it over a drink in New York City, I hope. Sounds great, thank you so much. My pleasure, thank you. Well, I'd be very careful of some of your software
1:59:07 companies and a lot of what's in the ARK portfolios, where you don't have profits and you may not have profits, where almost everything has to go right yet you're paying ridiculous multiples to sales. I'd always be careful of paying big multiples to sales for profitless businesses.